Journal Issue

Bretton Woods at forty The World Bank: from reconstruction to development: An institution emerges

International Monetary Fund. External Relations Dept.
Published Date:
June 1984
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Davidson Sommers

The Bank I joined in November 1946 as a member of the legal staff was tiny compared with the prestigious institution of today. Its staff numbered about one hundred and was preponderantly American. There were 38 member countries, over three quarters from Europe and the Western Hemisphere, with the United States entitled to over 37 percent of the voting power. Unrestricted capital paid in as 2 percent of subscriptions by members amounted to less than $150 million.

No operations were under way in 1946; there were even no agreed plans for operations. There had been little discussion of the Bank’s role at Bretton Woods. Its Articles of Agreement were hastily drawn up and derived from those of the International Monetary Fund on which attention had primarily focused.

The Board in charge

The earliest days were haunted by bitter disagreement at Bretton Woods and at the first meeting of the Fund-Bank Governors at Savannah, Georgia in March 1946 over the role of the Executive Directors. Some delegations, particularly the British under the leadership of Keynes, favored leaving the day-to-day operations to the management under policy oversight by a part-time Board consisting of high-level government officials. The United States, whose view prevailed, insisted on full-time Executive Directors, probably as a corollary to its opposition to “automaticity” in Fund drawing rights. Not much thought appears to have been given to the possibility that the Bank’s dependence on the private capital market for most of its operational funds might call for a different Board-management relationship.

This issue came over the horizon again after Eugene Meyer, publisher of the Washington Post, and formerly a New York investment banker and member of the U.S. Federal Reserve Board, became the Bank’s first President in June 1946. From the beginning he believed that convincing a skeptical financial community that the Bank would operate efficiently and without political domination would require the President rather than the Board to have operational responsibility. In this, he was strongly supported by the most influential staff member of those days, General Counsel Chester A. McLain, a New York lawyer of experience and reputation in the financial world. This attitude was not readily accepted by a Board consisting of strong characters like J.W. Beyen of the Netherlands, Sir James Grigg of the United Kingdom, Leon Baranski of Poland, Robert B. Bryce of Canada, Luis Machado of Cuba, and Emilio Collado of the United States. They were critical of management’s inactivity and took the initiative themselves in planning. There was growing tension in Board-management relations.

This period of tension was followed by one of chaos. In December 1946, Meyer, who was over 70 when he became President, resigned. He gave as his reason that he had taken on the job to get the Bank started and to organize a staff, and had accomplished both. However, many believed that the problem of relationships with the Board and particularly with U.S. representatives was a major factor.

Attempts promptly began to find a replacement. But word had spread in financial circles that the Bank was being run by government representatives, with the United States in the lead role, and that political lending would be inevitable. The presidency was offered and refused by a number of important persons, not all of them U.S. citizens. Then the situation worsened. In January 1947 the Bank’s Vice President, Harold Smith, formerly U.S. Director of the Budget, died. An interregnum followed. The U.S. Executive Director was named acting chairman of the Board. There was no one in charge of the staff.

During this period no business was done, yet there was an air of feverish activity. The Board held two meetings a week. In addition it had many standing and special committees, on Membership, Organization, Financial Policy, Loan Policy, Liaison with the Fund, Administrative Matters, Interpretations, and others. Between Board meetings and committee meetings, there was a session nearly every day.

Perhaps the atmosphere of those days can best be conveyed by describing the loan procedure which was adopted by the Board (but not carried out because there were no loans) and which illustrates the strong tendency toward detailed Board direction of operations. The relevant document said that an application for a loan received by the President would be reported to the Board, which would then decide on acceptance or rejection. If it was accepted in principle, the Executive Directors would authorize negotiations, issue negotiating instructions and terms of reference to the negotiators, appoint a loan committee, and receive weekly oral reports on the progress of negotiations. The same kind of Board role was evolving in regard to administrative and financial matters. It was an interesting but frustrating time for the staff.

Management takes over

At this stage, the position of Bank President was offered to John J. McCloy, a New York lawyer who had been the U.S. Assistant Secretary of War in World War II. He accepted under conditions that were, as I understand, essentially the following: that as President he would be given full executive responsibility for normal operations and administration; that the initiative for proposing loans would lie with the President, and the Board would act only after appraisal and recommendations by management and staff; and that to evidence its support, the United States would allow McCloy to nominate the U.S. Executive Director. After some hesitation, these conditions were accepted in substance by the U.S. administration and subsequently by the Executive Directors.

McCloy took office on March 12, 1947, and his nominee, Eugene R. Black, a Chase National Bank Vice President who had advised McCloy to accept the presidency but only on being assured of adequate authority, was appointed U.S. Executive Director. McCloy brought in Robert Garner as Vice President, a General Foods executive and former banker who energetically took charge of the staff as a forceful general manager.

All of us on the staff experienced a deep excitement at this turn of events. We could sense new life being breathed into the institution and hopes revived that the Bank could make a real contribution to the postwar world. Within weeks, processes that had been at a halt for months began to move. Administrative regulations, loan policies, and loan procedures were formulated, in some cases by Board action and in others by notification to and passive acceptance by the Board. Almost a year after the Bank opened for business in June 1946, but only two months after McCloy took office, the Bank’s first operation was approved, a $250 million reconstruction loan to France in May 1947.

Tension between Board and management had not come to an end, but took on a different tone. McCloy and Garner treated the Executive Directors rather cavalierly in the early days. Meetings were called much less frequently, often with little notice and advance circulation of documents. Some policy issues involved in the first loan were negotiated with the borrower without Board guidance. Although there was considerable sentiment among the Executive Directors that their proper role was not being recognized, McCloy’s personal qualities, reinforced by the Bank’s increased activity and the general sense of relief after the near disaster of the interregnum, induced them to accept the situation.

There was a brief flare-up a year later when the British proposal for part-time Executive Directors was revived, I believe by McCloy with the support of the United States, which now felt that the Bank should differ from the Fund in this respect. Once more this proposal was intensely divisive. An Ad Hoc Committee of the Board of Governors considered the matter and produced a watered-down recommendation (monthly Board meetings; either the Executive or Alternate Director for each constituency, or both, should serve part-time). This also met with firm opposition, particularly from the smallest member countries. In 1949, just as sides were being drawn, McCloy resigned to become U.S. High Commissioner in Germany and Black was chosen to succeed him. The Ad Hoc Committee’s report was brought up at the 1949 Annual Meeting and resulted in an unpleasant stalemate, which was dealt with in a not entirely original way by postponing the issue for another year.

Black was unhappy to see his term of office begin on a note of disharmony and determined to get rid of this issue promptly by direct negotiations. He obtained agreement on an even weaker proposal that permitted dual full-time representation in appropriate cases and left the timing of meetings to be decided by the Executive Directors (with monthly meetings for the time being). This agreement introduced an era of improving relations between Board and management that continued over the years as Black’s managerial style, together with the growth in Bank operations, provided the Board with more information and greater opportunity to give guidance and take decisions. The result, strong management responsibility for operations under Board policy and ultimate control, has been the Bank’s successful organizational structure since that time.

The markets approve

The Bank still faced another critical challenge. Since it had to raise the bulk of its operational funds on capital markets, the Bank could hardly be said to have come to life until it had proved its ability to borrow—and in those days this meant to borrow on the U.S. market since the United States was the only major source of private capital. But Wall Street needed to be convinced that the Bank would not be the politically oriented “do-good” institution that investors were predicting.

There also were legal obstacles that had to be overcome if the Bank were to be a substantial borrower. In the late 1940s, U.S. interest rates on long-term bonds were at a level that today seems unbelievably low—under 3 percent for high-grade issues. The possible buyers of such bonds consisted essentially of savings banks, commercial banks, and insurance companies. However, the enormous defaults on foreign loans in the 1930s had led many U.S. state legislatures to prohibit such institutions from investing significant amounts in foreign bonds; and those restrictions would in almost all cases apply to bonds issued by the Bank. In the circumstances the Bank’s potential market was quite restricted. Although the U.S. Government had been able to persuade New York State to change its restrictions on savings bank investment in 1946, it apparently had neither the energy nor the influence to reduce state restrictions generally.

The Bank had no alternative but to launch an intensive campaign to persuade potential U.S. investors, investment bankers, and state governments that the Bank’s lending would be economically sensible and that member governments, with special emphasis on the United States, would honor their obligations to make good on unpaid capital subscriptions if necessary. In this campaign McCloy played a major role, but Black, who was widely known as a bond market expert, was the leading spirit.

These efforts were successful enough to persuade the Bank to make its first offering after only four months of the McCloy regime. On July 15, 1947, the Bank issued $150 million 25-year bonds bearing interest at 3 percent and $100 million 10-year bonds bearing interest at 2 1/4 percent. The offer was handled by an agency arrangement with the direct participation of some 1,700 dealers. The two issues were promptly oversubscribed and the Bank came alive as a borrower.

Nevertheless, the large direct participation proved not to be the most effective technique for assuring the relative price stability, and the broad and deep market potential, needed to permit repeated borrowing. In the next few years, other techniques were tried. In 1950 an offering of $100 million 3 1/2-year 2 percent serial bonds was made by competitive bidding at a cost to the Bank of 1.92 percent. The offer was a temporary success but the price paid by the winning bidder was so high that a large block of the bonds was not resold and menaced the market for considerable time. In 1951, “sponsorship” by groups of investment and commercial bankers was tried, but this again led to instability. It was at this stage that a small investment banker said: “Sometime I hope to participate in a World Bank offering in which I do not learn a valuable lesson.” On the basis of this experience, the Bank adopted a more traditional issuing mechanism, a large underwriting syndicate managed by two leading investment bankers. This arrangement worked effectively and, with the later addition of three more investment bankers as managers, has continued to be the Bank’s vehicle for approaching the U.S. market.

During this period, one further step was made in the Bank’s learning process as a borrower. The private placement of a small Swiss franc bond issue, $4 million equivalent, gave the Bank its first lesson in nondollar borrowing and demonstrated its interest in becoming a participant in world markets. This was a signal pointing to the time when nondollar currencies, especially the deutsche mark, the Swiss franc, and the yen, would become essential for expanding Bank loan operations.

By the early 1950s, the Bank had a sound organizational structure; it had made its first few loans; and it had established its credit as a borrower. For this accomplishment, the leadership of McCloy, Black, and Garner was essential. But the result could not have been achieved without strong backing from member governments, support and guidance by Executive Directors, and outstanding efforts by its staff. Much remained to be done and learned, but the essential foundations had been laid on which later generations could build a powerful, effective, and truly international development institution.

I cannot conclude without adding a word or two about how it felt to be a staff member during this time. It was an exhilarating experience. After the hardships of the 1930s and World War II, it was a great privilege to take part in the task of demonstrating that international cooperation could play a major role in promoting economic and social health in the world. And the privilege was enhanced by the congeniality, openness, and mutual respect that prevailed among colleagues of different nationalities and experience. There are few deeper satisfactions in life than working as a member of a team of trusted and admired colleagues for a purpose worthy of a real effort. Being a Bank staff member in the early years met this standard.

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